Braskem(US:BAK)2024-04-12 10:06Industry Risks - The cyclical and volatile nature of the petrochemical industry may reduce net revenue and gross margin, with downturns in global economic activity potentially causing demand for products to decline [42]. - Higher costs for raw materials, including naphtha, ethane, and propylene, may increase product costs and negatively impact overall financial performance [35]. - Competition from larger suppliers in the petrochemical industry may pressure pricing and reduce market share, particularly from North American, Middle Eastern, and Chinese producers [44]. - Global macroeconomic factors, including military conflicts, may adversely affect margins and demand for products [35]. - The company faces significant risks from geopolitical instability, including military conflicts and trade tensions, which could adversely impact financial conditions and operational results [70]. - The ongoing military conflict between Russia and Ukraine has caused market volatility and increased commodity prices, particularly oil and natural gas, affecting overall business operations [70]. - The company faces risks related to compliance with environmental regulations, which could impact operations and financial results [36]. Supply Chain and Raw Material Dependence - The company relies on Petrobras for a substantial portion of naphtha and other raw materials, which may pose risks if supply is disrupted [35]. - The company relies on Petrobras for up to 70% of its naphtha supply and has several contracts expiring between 2026 and 2029, with uncertain renewal terms [54]. - The company sources a significant portion of its ethane from Pemex TRI in Mexico, and any disruptions in supply could materially affect production volumes and profit margins [58]. - The ethane supply agreement with Pemex TRI includes a minimum volume commitment of 30,000 barrels per day until the operational startup of an ethane import terminal or February 2025 [60]. - The company relies on limited or sole-source suppliers for raw materials, which poses risks to production and revenue if suppliers fail to deliver acceptable quality or quantities [65]. - Petrobras controls a significant portion of the pipeline infrastructure for naphtha transport in Brazil, and any failure to renew agreements could lead to decreased production volumes and increased costs [55]. Financial Performance and Costs - Fluctuations in the real/U.S. dollar exchange rate could increase inflation in Brazil and raise the cost of servicing foreign currency-denominated debt, adversely affecting financial performance [38]. - Changes in tax laws could lead to increased direct and indirect taxes, reducing gross margin and overall financial performance [36]. - Credit risks associated with significant customers may adversely affect the company's liquidity and working capital [48]. - The company does not hedge against price changes in raw materials, exposing it to fluctuations that could negatively affect gross margins [53]. - The company’s financial performance may be adversely affected by fluctuations in interest rates, particularly for floating rate debt obligations [156]. Environmental and Regulatory Compliance - The company faces potential regulatory changes that could increase costs and limit the application of its products, impacting demand [47]. - Environmental regulations may require significant capital expenditures for compliance, and failure to meet these regulations could result in fines ranging from R$500 to R$50 million [90]. - The company is subject to potential liabilities for environmental damage, which could impact its financial condition and operations [91]. - The company has provisioned R$1.6 billion for actions related to closing and monitoring salt cavities, environmental actions, and other technical matters as of December 31, 2023 [93]. - The company is committed to stabilizing cavities and monitoring soil as part of its socio-environmental responsibilities [94]. Corporate Governance and Control - Novonor S.A. owns 38.3% of Braskem's total share capital, which could influence corporate decisions and strategies [106]. - The company is at risk of changes in corporate control due to Novonor's ongoing judicial restructuring proceedings, which may affect management and strategic direction [106]. - The potential migration to the Novo Mercado could result in Novonor losing its indirect majority voting stock if all class A and B preferred shares are converted into common shares [114]. - The company is exposed to risks related to Novonor's judicial restructuring proceedings, which could affect corporate control and operational stability [112]. - Changes in corporate control could lead to significant alterations in management, business plans, and corporate governance practices, impacting financial performance [113]. Strategic Growth and Acquisitions - The company may pursue strategic acquisitions and investments, but failures in these areas could negatively impact financial condition and results of operations [35]. - The company is focusing on growing its biobased and recycling business as part of its strategy to foster a low-carbon circular economy [47]. - In 2022, the company acquired a minority equity interest in Nexus Circular LLC, focusing on advanced recycling, and established a joint venture with Terra Circular in the Netherlands [81]. - In February 2023, the company completed the acquisition of a 61.1% equity interest in Wise Plásticos S.A., a Brazilian mechanical recycling company [81]. - The company has a growth strategy that includes both organic and inorganic growth, with a focus on biobased and recycling businesses to mitigate climate change impacts [81]. Market and Economic Conditions - The company’s ability to export products is contingent on economic growth in target markets, with prolonged volatility potentially reducing demand [68]. - Brazilian power generation capacity is primarily based on hydroelectric facilities, and drought conditions could lead to increased energy costs and operational disruptions [102]. - The Mexican economy is expected to grow by 3.4% in 2023, following growth rates of 5.0% in 2021 and 3.1% in 2022 [161]. - Political instability in Mexico has led to a negative outlook on investor confidence, impacting the overall economic resilience of the country [165]. - The company faces risks from political and economic instability in Brazil, which may negatively affect demand for its products and overall financial performance [148]. Legal and Compliance Issues - The company agreed to pay an aggregate amount of US$957 million (equivalent to R$3.1 billion) under the Global Settlement related to anti-bribery violations [130]. - The company is liable for an additional R$410 million under the CGU/AGU Agreement, which is subject to adjustments by the SELIC rate [132]. - The company faces ongoing investigations and potential liabilities related to geological events in Alagoas, with no clear estimate of future costs [136]. - The company is subject to the Brazilian General Data Protection Law (LGPD), which imposes significant penalties for non-compliance, including fines up to 2% of the company's revenue in Brazil from the last fiscal year, capped at R$50 million per infringement [141]. - The company has been subject to independent monitoring for compliance with anti-corruption laws, which concluded in 2020 [134]. Sustainability and Emissions - Braskem recorded 9.9 million tons in carbon emissions in 2023, which could be negatively impacted by any carbon tax mechanism [104]. - The company aims for a 15% absolute reduction in greenhouse gas emissions (GHG) in scopes 1 and 2 by 2030, relative to the average of 2018, 2019, and 2020 [105]. - Braskem plans to achieve carbon neutrality by 2050 and expand green biopolymer production capacity to 1 million tons by 2030 [105]. - The company intends to recover 1.5 million tons of plastic waste by 2030 and expand the commercialization of resins with recycled content to 300,000 tons by 2025 and 1 million tons by 2030 [105]. Financial Obligations and Debt - As of December 31, 2023, the company had total foreign currency-denominated debt obligations of R$48,414 million (US$10,000 million), representing 90.5% of its consolidated indebtedness [154]. - The company’s long-term supply agreement with Pemex TRI for ethane could be modified or terminated due to political pressures, impacting operations [158]. - The company’s level of indebtedness could limit its ability to raise additional capital and may affect its operational flexibility [202]. - The company has received communication regarding the temporary cancellation of the shares offering due to market volatility, with intentions to resume when conditions improve [114]. Market Position and Competitiveness - The company is the largest producer of plastics in the Americas, with a global installed capacity of 21.4 million tons per year [224]. - Brazilian producers have a competitive advantage with PE, PP, and PVC prices averaging 25% higher than international reference prices due to lower freight and import tariffs [228]. - The company has established a network of 2,270 clients worldwide as of December 31, 2023, focusing on long-term partnerships and individual value creation solutions [230]. - The company benefits from a diversified supply base with 19 sources of supply in North America, enhancing redundancy and flexibility at its PP plants [228].